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Overview The strategic management process describes the method managers use to conceive of and implement a strategy that may lead to sustainable competitive advantage. The chapter begins with the first step in the strategic management process with a discussion of the role of vision, mission, and values in strategic management. Vision statements are covered in more detail with a particular emphasis on customer- versus product-oriented visions. Next, we expand upon the topic of corporate social responsibility in Chapter 1 with a discussion on firm ethical values. Not only do firms need to make a profit, but they also need to do so by doing good. This topic is reinforced in the Chapter Case (PepsiCo) and in Strategy Highlight 2.1 (Merck). The chapter addresses the roles a strategic leader must fulfill successfully to lead the company and achieve its strategic objectives and discusses Level 5 leadership theory. Finally, the chapter includes a description of three different processes used to “make” strategy. A top-down focused strategic planning process, a future-oriented scenario planning process and a participative planned emergence process are all compared and contrasted. Strategy Highlight 2.2 (Starbucks) illustrates planned emergence.

 

Learning Objectives LO 2-1 Describe the roles of vision, mission, and values in the strategic management process.

LO 2-2 Evaluate the strategic implications of product-oriented and customer-oriented vision statements.

LO 2-3 Explain why anchoring a firm in ethical values is essential for long-term success.

LO 2-4 Outline how managers become strategic leaders.

LO 2-5 Describe the roles of corporate, business, and functional managers in strategy formulation and implementation.

LO 2-6 Evaluate top-down strategic planning, scenario planning, and strategy as planned emergence.

 

CHAPTER OUTLINE

Chapter Case PepsiCo’s Indra Nooyi: “Performance with a Purpose”

2.1 Vision, Mission, and Values

2.2 Strategic Leadership

2.3 The Strategic Management Process

2.4 Implications for the Strategist

Strategy Term Project

my STRATEGY

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CHAPTER 2 STRATEGIC LEADERSHIP: MANAGING THE STRATEGY PROCESS

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Consider This Discussion Questions What “grade” would you give Ms. Nooyi for her job performance as a strategic leader? What are her strengths and weaknesses? Where would you place Ms. Nooyi on the Level-5 pyramid of strategic leadership (see Exhibit 2.4), and why? Support your answers. Students will have a variety of answers. Here is one we think is appropriate: Ms. Nooyi gets a B at this point. She is clearly well aware of PepsiCo’s internal resources and capabilities and how the external environment is threatening the firm. Her corporate decisions in terms of restructuring and diversifying have cleared the firm’s path and open significant opportunities in the food industry where the firm can leverage its capabilities and gain competitive advantage. However, her strategic intent is betting everything on being a corporate citizen. The true relationship between CSR and a firm’s performance is still uncertain and so far the results for Pepsi do not reflect that the firm is gaining competitive advantage over its competitors. The markets where the different business units of PepsiCo participates are highly competitive and have very strong players. Stronger business-level strategies are necessary to guarantee that the expected performance will be attained. With respect to the Level-5 pyramid of strategic leadership she would be located at or very near the top of it. Nooyi has proven to have superior interpersonal, informational, and decisional skills. She has also proven to be capable not only of guiding a company the size of PepsiCo, but of steering it towards a significantly different goal and convincing the organization to follow through by guiding with example and conviction. AACSB 2013 Standard 9 Leading in organizational situations

What should a strategic leader like Ms. Nooyi do if his or her vision does not seem to lead to an immediate (financial) competitive advantage? What would be your top three recommendations? Support your arguments. See the response below for the risks of staying the course when your vision is not yielding results. The remaining options can be simply identified as (1) the CEO comes up with a new implementation plan that creates competitive advantage with the vision, (2) the CEO gets a new vision, (3) the firm gets a new CEO with a new vision, or (4) the firm sells the business to another firm that has a management team with a new vision. You may want to solicit these big categories from the students first, then divide into small groups, each assigned to make a specific recommendation in one of these categories.

If you were a member of PepsiCo’s board of directors, would you be concerned with Ms. Nooyi’s and/or PepsiCo’s performance? If you were concerned, what course of action would you recommend? Would you go so far as to endorse Ms. Nooyi’s replacement with a new CEO who would focus more on PepsiCo’s stock market performance? Why or why not? While “Performance with Purpose” is a promising long-term strategy that could put PepsiCo in a very favorable position with its stakeholders (especially its customers), there can be no “Purpose” without “Performance.” In other words, shareholders want to see their investment grow by more than the industry average and certainly more than the firm’s direct competitors. Otherwise, there is an incentive for that investor to cash out and invest in the better performing firm or a less risky asset. Even if the investor understands the long-term value of the strategy, there is a need for short-term results. AACSB 2013 Standard 9 Social responsibility, including sustainability, and ethical behavior and approaches to management

Do you agree with Ms. Nooyi’s critics that PepsiCo should be split up into two companies—one focusing on beverages, and one focusing on snack foods? What would be the advantages and disadvantages of such a move? Students are unprepared to give a technically sound analysis of this strategy at this time. However, you can lay the groundwork for discussions of both industry profitability and diversification strategy with this discussion topic. Invite the students to identify key success factors in each industry. Ask them how they would go about determining which industry was more profitable. You might also ask some students to check the financial performance of a competitor in each industry: Coca Cola (KO) and Mondelez International (MDLZ) vs. PepsiCo (PEP). Then begin a discussion of the linkages between the two businesses for PepsiCo. Supply chain majors are likely to identify the overlaps in the distribution systems for the two businesses and effects on Pepsi’s negotiating power with its buyers. Marketing majors

 

CHAPTER CASE

This brief case is designed to provide material for a discussion of business values and corporate social responsibility. It also provides insight into strategic leadership and vision.

The “Consider This” section at the end of the chapter provides cautionary advice that profits also play a role in the leader’s responsibility.  

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may note the importance of brand management for each business, the overlap in target customer segments, the bargaining power with advertising media, and the shared pressure for healthy alternatives. A video on Ms. Nooyi’s Performance with a Purpose strategy is available at http://bit.ly/Ubhvs9.

Example and Discussion The MBA oath says in part, “my decisions affect the well being of individuals inside and outside my enterprise, today and tomorrow.” This echoes what John Mackey of Whole Foods has in recent years called conscious capitalism. PepsiCo offers an example of this thinking. In the last few years, PepsiCo has been contracting directly with small farmers in impoverished areas (for example, in Mexico). What started as a pilot project in PepsiCo’s Sabritas snack food division has now spread to over 1,000 farmers providing potatoes, corn, and sunflower oil to the firm. Pepsi provides a price guarantee for farmers’ crops that is higher and much more consistent than the previous system of using intermediaries. The farmers report that since they have a firm market, they are planting more crops. Output is up about 160 percent, and the farm incomes have tripled in the last three years. The program also has benefits for Pepsi as well. A shift to sunflower oil for its Mexican products will replace the 80,000 tons of palm oil it currently imports to Mexico from Asia and Africa, thus slashing transportation and storage costs.

What are the benefits of this program for PepsiCo? What are its drawbacks? It also lowers the cost in transportation and storage by importing from Mexico instead of Asia, and helps stabilize key suppliers which aid with the consistency of scheduling and processing. However, if sunflower oil produces a different taste than palm oil, it could have very negative effects on the sales of their products.

What other societal benefits could such a program have in Mexico? The benefit is that PepsiCo created a win–win situation for both the company and local farmers by improving the local economies. This means the company takes good care of the stakeholders by doing good.

If you were a PepsiCo shareholder, would you support this program? Why or why not? It is an ethical behavior and students should generally answer Yes. The answer for No can be supported if the student links it to an overall increase in costs or a loss of focus on the desires for products by the end consumer.

Can you find other examples of firms employing “conscious capitalism”? As noted, Whole Foods Market can be an example here because the business practices are ethical and employ environmental and societal responsiveness. Students may have a variety of answers concerning the food industry, especially with the increase in organic and locally grown initiatives. TOMS shoes is another example. For every shoe they sell in retail, they donate a pair of shoes to kids in underserved areas around the globe. (http://www.toms.com). AACSB 2013 Standard 9 Social responsibility, including sustainability, and ethical behavior and approaches to management

In our study of the strategic management process, we begin in the same place as strategic leaders by asking the following questions: What do we want to accomplish ultimately? What is our vision? How do we accomplish our goals? What is our mission? What guardrails do we put in place to act ethically as we pursue our vision and mission? What are our values? Discussion Building a great company has some similarities to building a great house. Using this analogy to start the chapter should resonate for many students. It is a helpful way to introduce the idea of vision and yet still tie it to something tangible that must be implemented (building that great new home). You may want to open the discussion of vision with this humorous video: http://bit.ly/1av478Q.

 

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2.1 VISION, MISSION, AND VALUES Vision, Strategic Intent, and Mission [LO 2-1]

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Examples Education is a subject most students will readily relate to. An example of an organization with an inspiring vision is Teach For America (see Exhibit 2.1). While some question the long-term effectiveness of Ivy League students teaching in blighted urban areas or impoverished rural areas for two years, there is no doubt that the organization is quite successful in terms of its ability to recruit a large pool of applicants each year and to generate passion. One of the interesting notes at the website is that the program has over 20,000 alumni and 67% of them are still in the educational field (and half of those are teachers in the classroom). Inspiring visions and missions (such as TFA’s) provide intrinsic motivations for employees and customers alike. When Facebook acquired Instagram, they sent Emily White to act as the new COO, charged with converting it from a revenue-less business into a profit center. One of her first steps was to spark the CEO to create a vision for the firm that inspires focus by advertisers, users, and employees. He came up with “to capture and share the world’s moments.” Ask students to evaluate this vision in terms of whether it will attract customers (advertisers) or users. How might it serve as a guide to employees about what they should or should not work on? See “Instagram pictures itself making money,” The Wall Street Journal 9/8/13 and video AACSB 2013 Standard 9 Leading in organizational situations

End of Chapter Discussion Question 2

What is strategic intent? How can it be useful for goal setting and achievement? Staking out a leadership position that far exceeds a firm’s current position. It is more widely used in Asian firms/culture and works best in tandem with stretch goals (see the following for added material on GOALS). Students could say strategic intent is the staking out of a desired leadership position that far exceeds a company’s current resources and capabilities. It provides clear goals that are guides for forming the mission and driving implementation throughout the organization. Strategic intent allows managers to operationalize their vision because it is not only forward-looking and future-oriented but also helps in identifying steps that need to be taken to make a vision become reality. Creating and executing strategy to achieve a strategic fit with today’s environment is like driving a car while looking only in the rearview mirror. The focus should be how to create competitive advantage tomorrow.

Examples The concept of strategic intent can be a bit difficult for some students to understand. It usually takes years from the time the “intent” is stated to when it becomes a reality. Additionally, it is a concept usually employed by new or small firms who plan to compete against much larger incumbents. We have found students enjoy learning something of the history of SONY and discovering that the “electric rice cooker company” grew into such a large and successful global firm. Key points for the students to take away from this discussion include the precarious position Japan was in at the end of WWII in 1945. The transistor was invented at Bell Labs at the end of 1947 and it took six more years for this upstart Japanese company to get access to the license. Persistence paid off. Further, students will often not fully appreciate the poor quality of products coming from Japan during this period. “Made in Japan” had connotations for poor quality well into the 1970s. All told, it is amazing how well SONY did for many decades, all because of gaining access to this transistor and their ability to deliver on their audacious strategic intent. Currently, Chinese companies such as Baidu, BYD, and Lenovo aspire to world leadership. These companies set their ambitious goals when they were only a fraction the size of the companies they were chasing. Indeed, they were so small that initially the market leaders did not even recognize them as potential competitors; many had never competed outside their domestic markets. Yet all made global leadership their mission, with goals so ambitious they exceeded the firms’ existing resources and capabilities by a large margin. Ask students to identify what challenges these firms needed to overcome and how they might measure success. AACSB 2013 Standard 9 Leading in organizational situations

End of Chapter Discussion Question 1 What characteristics does an effective mission statement have?

 

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2.1 VISION, MISSION, AND VALUES Customer-Oriented vs. Product-Oriented Vision [LO 2-2]

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A mission statement describes what a company does and why it does it. A clear and compelling mission statement can assist the company in reaching for stretch goals. The mission statement in most organizations should be customer-oriented. Customer-oriented defines the mission in terms of solutions for customer needs. Examples would be firms like Disney (“Make people happy”) or Ford (“provide personal mobility for people around the world”). Product-oriented defines the business in terms of goods or services provided. Examples here would be CSX (“the safest, most progressive North American railroad”) and Intel’s mission from 2000 (“the preeminent building-block supplier to the Internet economy”).

End of Chapter Ethical/Social Issues 2 Ask students to evaluate the vision or mission statements of a group of firms and discuss their evaluations in small groups. To assess achievement of this learning objective, you would want to ask them to choose whether each statement is more product-oriented or more customer-oriented. However, you may also want to include other issues: Is it framed within a set of core values? Does it provide employees with guidance on what actions or new ideas would or would not be consistent with the vision? Is it easy to understand? Is it clear how success would be measured? The end of chapter material includes an extensive list of firms. If you are using this as a quiz, you may wish to assign different firms from the list of other examples shown next.

Company Mission/Vision Statement Type

Micron “[To] be the most efficient and innovative global provider of semiconductor solutions.”

Product

McKesson “To provide comprehensive pharmacy solutions that improve productivity, profitability and result in superior patient care and satisfaction.”

Customer

Lucent Technologies “To live up to our responsibilities to serve and enhance the communities in which we work and live and the society on which we depend.”

Customer

Global Gillette “[To] provide branded products and services of superior quality and value that improve the lives of the world's consumers.”

Product

Dow Chemical Company

“To constantly improve what is essential to human progress by mastering science and technology.”

Product ?

Dole Food Company “To [supply] the consumer and our customers with the finest, high-quality products.”

Customer

CVS Corporation “[To] be the easiest pharmacy retailer for customers to use.” Customer

Bristol-Myers Squibbs Company

“To discover, develop and deliver innovative medicines that help patients prevail over serious diseases.”

Customer

ADM “To unlock the potential of nature to improve the quality of life.” Customer

Aflac “To combine aggressive strategic marketing with quality products and services at competitive prices to provide the best insurance value for consumers.”

Customer

McDonald’s “To be the world’s best quick service restaurant.” Product

LG “To be a great company with great people.” Customer?

Ford “To become the world’s leading consumer company for automotive products and services.”

Product

Nokia “A world where everyone can be connected.” Customer

Harley Davidson “We fulfill dreams through the experience of motorcycling by providing to motorcyclists and the general public an expanding line of motorcycles and branded

products ...”

Product

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Examples Students will see the basic differences in customer and product orientations fairly quickly. The railroad, for example, missing the chance to add on delivery services while letting UPS and Federal Express have that business seems to connect well. However, students don’t always see the difference between a customer-oriented mission and listening to the customer. We use the Henry Ford “horse and buggy” example, but sometimes students want something more contemporary. An additional example we’ve used is Steve Jobs at Apple. Until the innovation of MP3 players (and especially the iPod), customers never knew we needed to be able to carry around our entire music collection with us in our pocket! Although a product-centric view can potentially limit a company’s strategic options, it can also help a company to refocus. Shell Canada provides an example of how dealing with the question “What are we about?” led to a refocusing of the company and as a consequence, superior performance. Although the majority owner was Royal Dutch Shell, Shell Canada was more or less independent; its shares were traded on the Toronto Stock Exchange. In the 1980s, Shell Canada was a widely diversified business with interests not only in oil and gas exploration and distribution, but also in activities ranging from chemicals to forestry. Although it had performance comparable to the industry average, Shell Canada’s executives began to focus on the firm’s mission during this time. After some soul searching, the company’s managers realized that Shell Canada was at its heart a low-cost producer of oil and gas. With this new clarity of mission, Shell Canada began to sell off its peripheral businesses to refocus on oil and gas. In 2007, Royal Dutch Shell bought, at a cost of $8.7 billion, the remaining 22 percent of shares that it didn’t already own. By refocusing on oil and gas, Shell Canada was able to apply its core competency to increase the value created for customers, and to do this at a low cost. Its mission statement helped Shell Canada focus on the activities that yielded the greatest returns.

Values are ethical standards and norms governing the behavior of individuals within the firm or organization. Employees though will tend to follow the actual practice of their strategic leaders even if that is different from the stated values. Unethical and illegal behavior can destroy both companies and livelihoods.

Example

McKesson is ranked 15th on the Fortune 500 list (2010) and was founded in 1833 by John McKesson and Charles Olcott (www.mckesson.com), yet many students will have never heard of this company. The reason is their two main businesses (distribution solutions and technology solutions) are focused on businesses in the health care field rather than on consumers. We bring this up because we thought carefully about what organization to use as an exemplar of values. Many of today’s students are quite cynical of companies espousing big, bold, and charitable value statements. Too often these proclamations are indeed just words without the necessary tough choices backing them up in everyday business. Quite often, our students perceive that these lists of values and missions are produced for public relations reasons. If a firm like Walmart does something “good” (like put solar panels on top of their buildings), many students will view this is merely a way to move the headlines away from their many public labor issues. As a business-to-business firm, McKesson has no huge “public persona” in the marketplace. So if they are taking actions that seem to align with a core set of values, it may come across to the students as more well thought out and intentioned rather than “just for show.”

Discussion Topics You might want to use an example to show that firm’s with lax ethical values hurt more than their shareholders. Using a giant Ponzi scheme, Bernie Madoff, with the help of several employees in his investment securities firm, defrauded high-profile institutional and individual investors such as bank HSBC, Banco Santander, Human Rights First, the International Olympic Committee, film producer and CEO of DreamWorks Animation Jeffrey Katzenberg, actor Kevin Bacon, and Nobel Peace Prize winner Elie Wiesel. Madoff’s fraud totaled an estimated $65 billion. He was sentenced to 150 years imprisonment and fines of more than $170 billion. (“Q&A on Madoff case,” The Wall Street Journal, March 12, 2009.)

 

2.1 VISION, MISSION, AND VALUES Living the Values [LO 2-3]

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What responsibility do lower-level executives at Enron bear for not reporting questionable practices by the firms’ leadership? Why do you think only one employee initially came forward to report the irregularities and help with the investigation? Lower-level executives have an ethical responsibility to report questionable practices, beginning by questioning the authority, and moving outside the company if necessary. We don’t know how many employees really knew about the fraud underway at Enron versus how many “just heard rumors.” Still, with over 20,000 employees at Enron, and another 30,000 at Arthur Anderson, it is clear some people knew and did nothing about it. Whistle-blowing is a difficult choice and there are many factors to consider, but the fact that so few came forward says that the actions were in alignment with the values and culture that the firm actually practiced, even if it was at odds with their stated values. AACSB 2013 Standard 9 Ethical understanding and reasoning (able to identify ethical issues and address the issues in a socially responsible manner)

Strategic leadership refers to the behaviors and styles of executives that influence others to achieve organizational goals. The three roles of a leader are interpersonal, informational, and decisional.

According to the upper-echelons theory, organizational outcomes including strategic choices and performance levels reflect the values of the top management team (the individuals at the upper echelons, or levels, of an organization). The theory states that executives interpret situations through the lens of their unique perspectives, shaped by personal circumstances, values, and experiences.

The Level-5 leadership pyramid (Exhibit 2.4) is a conceptual framework that shows leadership progression through five distinct, sequential levels. Jim Collins in Good to Great found that all the companies he identified as great were led by Level-5 executives.

Exercise This exercise can be used to assess critical reasoning skills, such as inviting students to name a leader with whom they are familiar (work, school, home, or community) and trying to identify behaviors of that person that exemplify each of the five levels of leadership. Encourage students to identify both positive and negative traits and behaviors. Challenge the students to weigh the positives and negatives and explain why they believe some are more important than others. AACSB 2013 Standard 9 Leading in organizational situations

Discussion Consider the situation at JCPenney in 2011–2013 (see “Investor William Ackmann targets JCPenney CEO,” The Wall Street Journal, 8/8/13, and “Penney wounded by deep staff cuts,” The Wall Street Journal, 4/14/13; and a video). Ron Johnson was brought in to save JCP from sharply declining competitiveness. He completely re-envisioned the firm’s strategy, customer experience, store layout, and pricing position. He closed underperforming stores and retrained/replaced staff. Sadly, he lost even more customers in the process. The board of directors fired him and brought back the previous CEO (who had been replaced due to under-performance). Upper echelon’s theory: How did Ron Johnson’s previous experience and perspectives gained as head of Apple’s retail operations shape his strategic thinking at JCP?

 

Strategy Highlight 2.1 “Merck: Reconfirming its Core Values” illustrates how a firm’s values define both what it should do and what it should not do.

Discussion Topic This strategy highlight offers the opportunity to illustrate that a firm’s strategy is—and should be—constrained by its core values. These values guide a firm on strategies on which it should embark and strategies that it should avoid or abandon. It also does a nice job of illustrating that strategic planning involves many decisions that are legal but may not confirm to the firm’s ethical values. AACSB 2013 Standard 9 Ethical understanding and reasoning (able to identify ethical issues and address the issues in a socially responsible manner)

 

2.2 STRATEGIC LEADERSHIP Becoming a Strategic Leader [LO 2-4]

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Another such example is Stephen Elop’s leadership of Nokia. He came to Nokia from a senior leadership position at Microsoft. He chose a unique strategy for Nokia in the handset space by eschewing both Nokia’s own OS, Symbian (Apple and BlackBerry strategy), and Google’s Android (all other successful firms), in favor of the weakest market share at that time, Microsoft OS. His strategy was a large enough failure to nearly sink the firm. To salvage the situation, he and the Nokia board of directors negotiated a $7B sale of the handset business to Microsoft. Encourage students to delve into the mental models that Elop would have brought to Nokia based on his Microsoft experience. Use the discussion to tease out some of Elop’s strengths as a leader. Why is he perceived differently in Seattle and Norway? Why or why not would he make a good CEO for Microsoft? (See “Nokia CEO Elop has big to-do list,” The Wall Street Journal, 9/3/13, and “Nokia’s Stephen Elop: Next Microsoft CEO?” The Wall Street Journal, 9/4/13.) AACSB 2013 Standard 9 Leading in organizational situations

Example You may want to give the students a deeper understanding of what the Level-5 leadership pyramid means for their own careers. You might describe it thus: Taken together, you become an effective and ethical leader by sequentially mastering each of the five steps in the strategic leadership pyramid. Your training in college allows you to become a highly capable individual who can make productive contributions. If you take a first job immediately after your undergraduate degree, you will likely begin your corporate career in a functional area that was your focus or major in college (e.g., accounting, operations management, marketing, finance). As you move down the learning curve through group work in college and on-the-job training, you develop the ability to work effectively with others to achieve team objectives. With these skills, you move to Level-2 leadership. As responsibilities come to you, you will be able to develop and demonstrate the ability to organize resources efficiently and effectively to achieve strategic objectives. At Level 3, you have become an effective manager—someone who produces results. Levels 4 and 5 require a stronger element of strategic leadership than the prior levels. When given the chance to work as a general manager (someone who has profit-and-loss responsibility for a unit or group), you will need Level-4 strategic leadership qualities. At Levels 4 and 5, you will have increasingly dramatic opportunities to put to use the AFI framework you’ve learned from this book: You will need to be able to present a compelling vision and mission to inspire others to achieve superior performance. Doing so requires an intimate understanding not only of the inner workings of your company (Chapters 1 and 2), but also of the external environment. The internal and external analysis concepts (Chapters 3 and 4) will help you lay the foundation to formulate strategies that can improve firm performance (Chapters 5 through 7). Having produced results at the business level, you might be tapped as the CEO of the company. At Level-5 strategic leadership, you need to reconcile a strong will and work ethic (which got you to the top) with the humility to lead a company by example. To do this effectively, you need a deep understanding of corporate-level strategy (Chapters 8 through 10) and organizational design (Chapter 11). You also will need to exhibit unfailing personal integrity (Chapter 12).

End of Chapter Discussion Question 4 This chapter introduces three different levels appropriate for strategic considerations (see Exhibit 2.5). In what situations would some of these levels be more important than others? For example, what issues might be considered by the corporate level? What do you see as the primary responsibilities of corporate-level executives? When might the business-level managers bear more responsibility for considering how to respond to an issue? In what situations might the functional-level managers have a primary responsibility for considering an issue? How should the organization ensure the proper attention to each level of strategy as needed? The “Where, How, Implementation” questions can be quite useful to help students think about a particular strategic decision and which level of strategy it represents. Balance of the strategic levels is difficult and can be an area where many companies falter. In larger organizations, the strategic responsibilities will reside in different individuals and teams. This helps assure that no level is completely neglected, but it doesn’t address the appropriate mix of strategic levels. Some organizations have implemented a periodic review of strategies at all levels of the firm to try to assess the health of the overall company and its business models.

 

2.2 STRATEGIC LEADERSHIP Corporate, Business Unit, and Functional Leaders [LO 2-5]

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Students may be more familiar with functional and business-level strategies from their own work experiences. Functional areas can develop many great ideas on how to implement business and corporate strategies. Given a supportive organizational climate, these areas can also produce emergent strategies. Relative importance is often based on external factors. When Lou Gerstner came to IBM and started to refocus the firm on services rather than hardware, the corporate strategy and transition was preeminent. Many of the business-level strategies—for example, in hardware-focused SBUs—were likely abandoned. On the other hand, when Microsoft rolls out Bing and partners with Facebook, Google’s business- level strategies will be most important in figuring out how to compete in this new online search environment.

Exercise This can be used as a small-group exercise in class or as a quiz to assess decision-making skills (ability to identify a problem). Assign five newspaper articles or mini-cases for students to read and ask them to identify for each one the firm’s key problem and whether its solution will be a functional-, business-, or corporate-level strategy. AACSB 2013 Standard 9 Framing problems Here are some possible examples that you might use:

Top-down strategic planning is typically performed by senior managers and strategy specialists on a 3- or 5-year cycle. The output is usually a detailed book (or PDF file these days) with analysis of current positions and plans for future growth.

End of Chapter Discussion Question 3 In what situations is top-down planning likely to be superior to bottom-up emergent strategy development? Top-down strategic planning is usually best in relatively stable environments. Emergent strategy is preferred in more uncertain times. However, the Mintzberg framework identifies that combining the two approaches is likely to yield the best results. An organization in today’s environment should strive to be flexible enough to adjust the proportion of top-down and bottom-up ideas based on the situation. Top-down planning and decision-making may also be best in businesses in which reliability and consistency are key success factors. (Do you want your nuclear power plant operators experimenting with emerging ideas?) Bottom-up planning and decision-making offers advantages in innovation-based businesses where (1) being closer to knowledge of customer needs and competitive trends may create information advantages at lower levels of the organization and (2) a diverse stock of non-redundant knowledge may yield more radical innovations.

 

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Source Problem Level

PepsiCo Chapter Case Should the snack and beverage businesses be separated? Corporate

Starbucks Strategy Highlight Should we add a line of Frappuccino products? Functional

JCP Should we continue the differentiated strategy begun by the former CEO? Business

Instagram Can we gain revenue with advertising without losing our competitive advantage with users?

Business

Apple How can Apple differentiate its next iPad more effectively from the Samsung Galaxy to increase customers’ willingness to pay?

Business

Tesco (Fresh and Easy) Given the losses sustained thus far, should Tesco pull out of the U.S. market? Corporate

2.3 THE STRATEGIC MANAGEMENT PROCESS

Top-down Strategic Planning [LO 2-6]

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In scenario planning, critical elements are to create a diverse set of “what if” plans in the formulation stage and then to drive forward with a dominant strategic plan in the implementation phase.

Discussion Topics Scenario planning may become more widely used going forward if the economic, political, and technological forces keep changing rapidly. The spring 2011 protests across the Middle East have recently made for some interesting discussions. The global power shift toward Asia would make another good discussion that ties socio-political uncertainties to scenarios. Exhibits 2.6 and 2.7, show how the AFI framework overlays on the scenario planning process. This provides an opportunity to walk thru the strategy-making process.

End of Chapter Discussion Question 5 Identify an industry that is undergoing intense competition or is being featured in the business press. Discuss how scenario planning might be used by competitors to prepare for future events. Can some industries benefit more than others from this type of process? Explain why. Industries that by their nature need to make “big bets” are often users of scenario planning. This would include the oil industries. It would also include other major extraction companies (Alcoa, for example) and capital intensive industries such as semiconductors (Intel). These firms must make major investments around the globe to be successful in their industries. Scenario planning can help them with boundary conditions on their choices. Students can relate to the growing socio-cultural concerns about obesity and the impact that this may have on the beverage and quick service restaurant industries. Building on the ChapterCase, you can invite student teams to write a rich, narrative description of life in a world where high-caloric food is highly regulated. Then they should be asked to identify implications for either industries.

Examples Shell predicts that in 2025 most of our energy will continue to be generated from fossil fuels but 20 percent will come from alternative energy sources like wind, solar, and hydro power. Given Shell’s past success in using scenario planning, one ought to pay attention to its predictions. Shell can claim a number of accurate predictions to its credit. In the 1960s, with the price of a barrel of crude oil around $10 (compared to a record high of close to $150 in the summer of 2008), managers at Shell began to formulate strategic plans for a future with a strong OPEC (the cartel of oil-exporting countries) and an accompanying drastic rise in oil prices. When the price of crude oil suddenly surged to over $80 a barrel in the late 1970s, Shell was well-positioned to take advantage of this new situation; other oil companies were scrambling to adjust. Shell activated one of its alternative strategic plans that detailed how to obtain crude oil from North Sea drilling, to which the firm had already secured the rights. In the early 1980s, Shell made strategic preparations to take advantage of another apparently far-fetched scenario when it speculated that communism might fail, bringing down the powerful Soviet Union and ending Soviet artificial restrictions on the supply of natural gas. As a consequence of these strategies, Shell moved from eighth place to become the second-largest oil company in the world. More information is available on Shell’s website on the process of scenario planning, their past scenarios, and their projections on renewable energy adoption. Shell’s latest scenarios (video) envision the world as it might be in 2100. To conduct successful scenario planning, managers need current information. The network-equipment giant Cisco Systems has invested huge sums in technology to generate just this kind of data. Cisco’s senior executives can track daily customer order data from its sales teams around the globe with up-to-the-minute accuracy. Walmart’s CEO Mike Duke indicates that he too is using real-time sales data tracking, enabling top executives to monitor daily sales at each of the over 8,500 Walmart stores worldwide in real time. With these real-time data systems, managers can identify emerging trends in each region and market segment long before they materialize in financial data. This in turn allows them to fine-tune their functional strategy with unprecedented accuracy and speed.

 

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2.3 THE STRATEGIC MANAGEMENT PROCESS

Scenario Planning [LO 2-6]

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Planned emergence is the less formal process that tends to emerge from the “bottom-up” of the organization. The Mintzberg framework reflects that strategy may be driven from the top or the bottom of the organization.

Example An unexpected event at the largest rail carrier in the world, Japan Railways, led to diversification from railroads into bottled water. Japan Railways was constructing a new bullet train through the mountains north of Tokyo, requiring many tunnels. In one of the mountains, persistent flooding caused huge problems. Engineers responded by drawing up complex plans to drain the water. Meanwhile, workers inside the tunnel were making good use of the water—they were drinking it. A maintenance worker suggested the water should not be pumped away but rather bottled and sold as premium drinking water because it tasted so fresh. Its source was snow pack, purified and filtered in the slow percolation process through the mountain’s geological layers and enhanced on the way with healthy amounts of calcium, potassium, and magnesium. Eventually, Japan Railways set up vending machines on 1,000 railroad platforms in and around Tokyo, and home delivery of water, juices, and coffee followed. The employee’s proposal had turned an expensive engineering problem into a multimillion-dollar business. Because Japan Railways was willing to define its business as broader than just being in railroads, it was able to capture the emergent strategy and diversify into drinking water. In contrast, given its product-oriented vision to be the safest, most progressive North American railroad, it is doubtful that CSR Railroad would have reacted in a similar fashion had it encountered the same serendipitous event. A functional manager at IBM suggested entry into the emerging life sciences field. She saw a business opportunity for IBM, in which application of high-performance computing and information technology could solve thorny problems that accompanied data-intensive work such as decoding human genomes and furthering personalized medicine. IBM’s general and corporate managers supported this strategic initiative, dubbed “information-based medicine.” This new business opportunity generated more than $5 billion in revenue a few years later.

End of Chapter Small-Group Exercise 2

In many situations, promising ideas emerge from the lower levels of an organization, only to be discarded before they can be implemented. It was only extraordinary tenacity (and indeed, disregard) for the policy of selling only corporate-approved drinks that permitted the Frappuccino to “bloom” within Starbucks (see Strategy Highlight 2.2). What would be some problems that would need to be addressed to introduce an angel-network idea into a firm? Use a firm someone in your group has worked for or knows well to discuss possible issues of widely distributing small funding level approvals across the firm. This exercise builds on some of the ideas applied in the Starbucks Strategy Highlight, combined with thoughts from Gary Hamel’s book The Future of Management (Harvard 2007). It also integrates some of the real options concepts, because these “seeds” of funding spread throughout the organization will enable limited funding of many different ideas and give each project some time to get traction without it being a “bet the business” decision.

 

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2.3 THE STRATEGIC MANAGEMENT PROCESS

Planned Emergence [LO 2-6]

Strategy Highlight 2.2 “Starbucks CEO: It’s Not What We Do”

This highlight illustrates serendipity and emergent strategy.

Discussion Topic There are two key points we like to bring out about this Strategy Highlight. The first is what type of risks was the store manager taking to offer a drink on the menu after it had been turned down by the executive committee? In some organizations, this would be cause for termination. So not only was the store manager relentless in pursuit of the idea, she may have been putting her job on the line. Second is the idea that the organization must be willing to accept ideas that “emerge,” and implement them even if they were not driven by senior leadership.

 

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INSTRUCTOR MANUAL NEWER FACULTY Implementation ideas may take on many issues, depending on the student’s prior work experience and knowledge. Most apparently, where does the department manager take the 2 percent from the budget to invest it in these small-scale experiments? What if some managers want to invest and others don’t? What sorts of controls would the firm have on the types of projects the employees could explore? Then there’s the loss of control by the senior managers or finance, who have been approving all projects previously. At what point do these small projects need to get larger approvals within the organization? The mid-level manager should bring the idea to the attention of the top executives, ideally with a proposal of what would need to be changed as well as what it would offer. A good executive has to look at all possibilities for improving the company even if it requires significant change. (Japan Railways moving to bottled water is an example of a company that made an unexpected change.) Raise the issue of the importance of brand value and global brand image as a core competence of Starbucks, as a key success factor in the industry, and as the most valuable asset on the balance sheet. Encourage your marketing majors to explore the risks associated with independent, bottom-up experimentation with elements of strategy that have high brand impact. How might relationships with franchisees been harmed by offering products in company-operated stores that were not available to partners?

Examples and Discussion Topics

Harry Coover – Super Glue – Eastman Kodak During WWI, Harry Coover was working with a team at Eastman Kodak trying to make a clear plastic for precision gun-sights for soldiers. He was exploring a chemical compound called cyanoacrylates. The problem with this research was that cyanoacrylates were extremely difficult to work with. Moisture caused these chemicals to polymerize and bond, and given that nearly all objects carry some moisture, bonding occurred frequently. In 1951, Dr. Coover was working on a new project to discover a heat-resistant acrylate polymer for jet canopies. During this project, Coover came back to the cyanoacrylates, when in a test they stuck a pair of refractometer prisms together. This time the commercial potential became clear. In 1958, Kodak launched the product later renamed Super Glue. What was different the first time Coover ran into the superglue than the second time?

Patsy Sherman – Scotchgard – 3M In 1960, researchers at 3M were working with fluorocarbons to be sold as coolant liquid in air conditioning equipment. One of the researchers noticed, after accidentally spilling some coffee on her shoe, that the residue of fluorocarbons turned the coffee into small beads of liquids without staining. After observing this unique experiment, Sherman contacted the chemist Sam Smith, and together they began developing a product that could actually repel oil, water, and other residues from fabric. In 1956, the Scotchgard protector was launched. What skills are needed to go from a coffee spill to an idea for a commercial product to meet a consumer need? You might discuss the role of absorptive capacity, deep understanding of customer needs, or intuitive thinking.

Arthur Fry and Spencer Silver – Post-it Notes – 3M In 1968, Dr. Silver, who was a senior chemist in 3M’s central research lab, had developed a high-quality adhesive that was easily peeled off from the surfaces it adhered to. This particular discovery was not considered a great success, since the real goal of Silver’s project was to find a super-strong adhesive, and instead they found a rather weak one. Arthur Fry, a collaborator in 3M’s research lab, was singing in the chorus of a small church on a given Sunday morning. He was frustrated by the how the bookmarks he used always slipped away. He suddenly remembered Silver’s presentation. Fry wrote up a proposal to develop a reusable, reliable, and adhesive bookmark and presented it to his supervisors. 3M’s culture of innovation led the supervisor to give an opportunity to Fry to develop and try out his idea. An interesting question is not so much how firms allow for serendipity to grow to a successful innovation, but how the firms promote the emergence of such serendipity. It is well known that 3M fosters innovation and allows its employees to dedicate 15% of its time to pursue projects that the employees consider good potential innovations for the firm. In great part, the embracement of this culture is what led to the prior products’ success. A less open firm would simply have shut both projects down.

George de Mestral – Velcro In 1948, when Mestral was returning from a nature hike with his dog, he noticed that both the dog and he were covered with burr. Filled with instant curiosity to determine what made this material so sticky to his clothes’ fabrics and the dog’s hair, he immediately headed for his microscope and observed the little burrs to try to understand why they were so incredibly adhesive. What he discovered from this serendipitous event is that the burrs contain millions of miniature hooks which allowed those seeds to strongly attach to his clothes and his dog’s hair. He imagined a fastening system that contained both parts (one similar to the fabrics’ and the other to the burr). He set himself to identify the appropriate combination of materials so as to build the ideal fastening machine he envisioned. In spite of the high level of skepticism and laughter that his idea initially generated, he joined efforts with a weaver from the French textile industry and began a joint R&D effort for the product. Through trial and error he found out that nylon provided the best grip over other fabrics like cotton. By 1955, Mestral filed a patent for his product named Velcro (velour which means velvet, and crochet which means hook). Why was the textile weaver critical to the innovation process? Discuss complementary resources.

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Campbell and Roberts – Sildenafil Citrate (Viagra) – Pfizer Simon Campbell and David Roberts were looking for compounds that helped treat angina, which is a disabling heart condition generated by a shortage of oxygen in the heart. The compound sildenafil citrate was isolated and taken to trials for this purpose. Although the drug proved inefficient to treat angina in the second stage of clinical trials, a promising side effect was reported. Patients taking the drug were experiencing erections. Pfizer decided to change direction and invested 340 million dollars to conduct a new Phase II trial to test the effect on impotent men. Could an individual have capitalized on this serendipitous discovery? No, expertise in managing the FTC review process, clinical trials, and marketing to doctors is required. The firm’s structure and culture was clearly supporting serendipity and helping transform it into a successful product.

End of Chapter Small-Group Exercise 1 Discuss within your group methods that the STEM Education Coalition might use to gain partners, particularly business organizations, that will help them make sure STEM education is a national policy priority. Given the budget crisis, how can they persuade congressional representatives to support funding? Several topics might be covered while introducing this discussion for students. The first is the role of a clear vision of the future for the organization and a sharply defined mission. If you used the Instagram example earlier in the class session, draw parallels with the purposes that a clear vision statement is intended to serve for that firm to communicate with and motivate various stakeholder groups.

How does funding for STEM education affect job opportunities for business majors? Some students are likely to focus on obvious “What’s in it for me?” issues like less scholarship and loan money available to business school students as resources are targeted to support STEM students. You can use a quote from Isaac Asimov to move discussion forward, "The important prediction is not the automobile, but the parking problem; not the radio, but the soap opera; not the income tax, but the expense account." Encourage them to look beyond the automobile to find the parking lot opportunity. You might also want to bring in ideas from organizational theory and discuss the role of business in shaping public policy.

Although group members may not be STEM majors, brainstorm ideas about how you might advise businesses to modify their operations or to expand/transform their operations in order to find opportunities in global trends over the next 15 years. Choose a business of interest to the group. Then consider scenarios in which the business may thrive as one of the five trends develop. For example, the majority of businesses might want to ask, “What if threats to cyber-security increase?” Or, “What if water resources become more scarce? How would this affect production or demand for the goods produced?” Your group may also consider businesses or industries that may decline as a result of the trends. This is another opportunity to identify the business implications of scenario planning. In addition to industries that may decline, ask students to consider industries that may be off-shored as a lead in to the mySTRATEGY section in Chapter 3.

What additional developmental opportunities might prepare business majors for playing key roles in facing the global trends of 2030? What skills will you need in order to manage effectively the STEM employees who are central to innovation? This is a great opportunity to introduce the concept of competency development plans that may arise at the firm level (in Chapter 4; also that chapter’s mySTRATEGY section). The discussion may start out with a very student-oriented cognitive bias, yielding ideas like “Take a course in physics or electrical engineering.” While the new MOOC trend does open the opportunity for non-credit courses in a wide range of topics, try to move the discussion beyond what should be studied. Managers will not need to know everything that the STEM majors who work for them know, but they will need to know how to communicate in a common language and understand problem-solving and decision-making processes in those fields. What have they learned in stats about hypothesis testing that might help them in a managerial role in an R&D lab, for example? On a simple level, which newspapers or journals might they read regularly to improve their ability to talk about and understand the latest technical trends (The Wall Street Journal technology section, Discover, etc.).

 

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2.4 IMPLICATIONS FOR STRATEGISTS

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Term Project Module 2  

Search for a vision, mission statement, and statement of values for your chosen firm. Note that not all organizations publish these statements specifically, so you may need to make inferences from the available information. Relevant information is often available at the firm’s website (though it may take some searching) or is contained in its annual reports. You may also interview a manager of the firm or contact Investor Relations. You may also be able to compare the official statement with the business press coverage of the firm. First, the student will search for the firms’ mission statement. Remember, some firms use the term mission and vision interchangeably, so the student may need to adapt a vision statement as the mission if it is appropriate.

Identify the major goals of the company. Major company goals are quite often available through the annual reports that each public firm must file with the SEC (free at http://www.sec.gov/edgar.shtml).

Does the firm seem to have any longer-term challenging or stretch goals that would serve as its strategic intent? Longer-term goals are usually in the annual reports. We suggest going back a few years in the annual reports and comparing what the firm said three or five years ago to what they said most recently.

Trace any changes in strategy that you can identify over time. Try to determine whether the strategic changes of your selected firm are a result of intended strategies, emergent strategies, or some combination of both. Pulling a couple of older annual reports will also help in the formation of a timeline for major changes in the organization. Also, check the firm’s website. Often, firms will include a history or “timeline” section from their home page under “About Us” or the “Investors” tab.

How much are your values worth to you? Identify your personal values. How do you expect these values to affect your work life or your career choice? These questions are meant to be personal but we offer a few thoughts on them. Values should play some part, but it is not likely to be the most important influence. If your only goal is to become head of a large company, market growth and expansion may become a high priority. However, success can be found in many places, and it is usually more important to find a company with good leadership (firm effects) than to worry solely about market growth (industry effects).

How much less salary would (did) you accept to find employment with a company that is aligned with your values? Studies have shown that once workers get above a certain “pay the bills” space financially, intrinsic rewards often become more important than money. We have found a wide variance of answers when we have run this exercise in our classes.

How much are you willing to “pay for pay” if your dream job is in management consulting or investment banking? Encourage students to consider work/family life balance and recognize the implications of long hours and extensive travel that usually accompany high-paying jobs.

 

STRATEGY TERM PROJECT

mm yy STRATEGY

How to position yourself for career advantage

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